Singing the same song
15 October 2019
BCBS-IOSCO has recommended a one-year extension on the final implementation phase of uncleared initial margin rules but several regulators are still yet to agree, and they all need to say yes
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Earlier this year, the smallest firms affected by the Uncleared Margin Rules (UMR) were offered a life raft when the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) recommended a one-year extension on the final implementation phase of the initial margin (IM) requirements for non-centrally cleared derivatives.
This extends the deadline to 1 September 2021 for phase six firms, while the deadline for phase five firms remains at 1 September 2020, thereby offering those that were struggling to prepare more time to juggle UMR alongside myriad other demands on their resources.
However, while many in the industry are celebrating the much-needed reprieve, others are warning in-scope market participants not to take their foot off the pedal for its preparation efforts, as for many, the delay is still not a done thing.
Shaun Murray, managing partner of Margin Reform, says: “BCBS IOSCO has extended the time available for the industry, which effectively splits the problem into more manageable chunks of delivery. Following advocacy, BCBS-IOSCO would feel like they have given the industry the time for the smaller firms to assiduously prepare rather than shoe-horning everyone through the 2020 window.”
He predicts: “The extended timeframe makes things easier for the industry, which is why I expect the regulators will see that and support it. I will be surprised if a regulator comes out against anything that BCBS-IOSCO have proposed.”
And indeed, a significant number of the regulators have verbally indicated or provided a written statement saying they support it allowing them extra time but it is still important that the remaining regulators are all on board.
At time of writing, the US, the EU, Hong Kong, Singapore, South Korea and Australia have agreed to the BCBS-IOSCO extension. Meanwhile, Canada, South Africa, Japan, Mexico and Brazil are still considering the proposal. Other global regulators are yet to publically respond. Although the general reaction by regulators to the deadline extension has been positive, all the regulators must confirm their approval in order to avoid market disruption.
A problem could arise if, for example, there are two firms conducting a transaction and one is from a jurisdiction that hasn’t agreed to the extension, that firm still has to be prepared to operate under the terms of the sixth phase of the margin rules.
What are the initial margin requirements?
The IM requirements for non-centrally cleared derivatives seeks to establish international standards for non-centrally cleared derivatives. Plans started back in 2009 at the G20 Pittsburgh Summit, when the international forum for the governments and central bank governors from 19 countries and the EU, responded to the global financial crisis of 2008-2009 by agreeing to a financial regulatory reform agenda covering over-the-counter derivatives markets. This included recommendations for the implementation of margin requirements for non-centrally cleared derivatives.
Since then, the International Swaps Derivatives Association (ISDA) and Securities Industry Financial Market Association have observed that, regulators around the world have implemented IM requirements for non-centrally cleared derivatives generally in accordance with the final framework, but with some critical differences in certain instances (See figure one).
These rules are commonly referred to as UMR, and margin collected and posted under UMR is referred to as ‘regulatory margin’.
UMR began to be phased-in on 1 September 2016 for the largest market participants and broader implementation of variation margin requirements occurred in March 2017. IM requirements continue to be phased-in annually, bar the new extension.
As the market’s struggles to meet the deadlines became apparent, BCBS-IOSCO issued a statement on July 2019 that outlined its recommendation to a one-year extension on the final implementation phase (see figure two). BCBS-IOSCO say that the extended timeline is set to support the smooth and orderly implementation of the IM requirements.
At this point, covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion will be subject to the requirements. According to the BCBS-IOSCO, this is consistent and harmonised across their member jurisdictions and will also help avoid market fragmentation that could otherwise ensue.
All instruments (including physically settled forex forward and forex swap transactions) count for the purpose of calculating the AANA, even if they eventually benefit from an exemption of initial margin exchange.
BNP Paribas explained that given the steep increase in the number of institutions in scope of the September 2020 deadline, in July 2019 BCBS/IOSCO published a revised policy framework stating that the threshold applicable in 2020 would be raised from €8 billion to €50 billion and that the €8 billion threshold would be postponed to September 2021. This statement will be transposed in every jurisdiction in the near future.
Meanwhile, in terms of the instruments concerned, BNP Paribas say that the scope of non-cleared derivative instruments that are subject to the collection of initial margin is generally consistent across the main jurisdictions in Europe, Asia Pacific and the US.
Physically settled forex forwards and swaps are excluded across all jurisdictions. However, some jurisdictions may have specific exemptions, either on a permanent basis (e.g. equity options and forwards are out of scope in the US) or on a temporary basis (e.g. equity options are exempted in the EU only until 4 January 2020), BNP Paribas outline.
In terms of how prepared companies are for IM, Murray says that despite the extended deadline, he hasn’t heard of anyone taking their foot off the gas.
“I haven’t seen a spike in client interest but I also haven’t seen a slowdown in client interest,” he explains. “I think there are a number of clients out there who have been sat waiting for this to come out who are now going to have to gear up to get going because they realise they are still phase five.”
Figure 1
Figure 2
This extends the deadline to 1 September 2021 for phase six firms, while the deadline for phase five firms remains at 1 September 2020, thereby offering those that were struggling to prepare more time to juggle UMR alongside myriad other demands on their resources.
However, while many in the industry are celebrating the much-needed reprieve, others are warning in-scope market participants not to take their foot off the pedal for its preparation efforts, as for many, the delay is still not a done thing.
Shaun Murray, managing partner of Margin Reform, says: “BCBS IOSCO has extended the time available for the industry, which effectively splits the problem into more manageable chunks of delivery. Following advocacy, BCBS-IOSCO would feel like they have given the industry the time for the smaller firms to assiduously prepare rather than shoe-horning everyone through the 2020 window.”
He predicts: “The extended timeframe makes things easier for the industry, which is why I expect the regulators will see that and support it. I will be surprised if a regulator comes out against anything that BCBS-IOSCO have proposed.”
And indeed, a significant number of the regulators have verbally indicated or provided a written statement saying they support it allowing them extra time but it is still important that the remaining regulators are all on board.
At time of writing, the US, the EU, Hong Kong, Singapore, South Korea and Australia have agreed to the BCBS-IOSCO extension. Meanwhile, Canada, South Africa, Japan, Mexico and Brazil are still considering the proposal. Other global regulators are yet to publically respond. Although the general reaction by regulators to the deadline extension has been positive, all the regulators must confirm their approval in order to avoid market disruption.
A problem could arise if, for example, there are two firms conducting a transaction and one is from a jurisdiction that hasn’t agreed to the extension, that firm still has to be prepared to operate under the terms of the sixth phase of the margin rules.
What are the initial margin requirements?
The IM requirements for non-centrally cleared derivatives seeks to establish international standards for non-centrally cleared derivatives. Plans started back in 2009 at the G20 Pittsburgh Summit, when the international forum for the governments and central bank governors from 19 countries and the EU, responded to the global financial crisis of 2008-2009 by agreeing to a financial regulatory reform agenda covering over-the-counter derivatives markets. This included recommendations for the implementation of margin requirements for non-centrally cleared derivatives.
Since then, the International Swaps Derivatives Association (ISDA) and Securities Industry Financial Market Association have observed that, regulators around the world have implemented IM requirements for non-centrally cleared derivatives generally in accordance with the final framework, but with some critical differences in certain instances (See figure one).
These rules are commonly referred to as UMR, and margin collected and posted under UMR is referred to as ‘regulatory margin’.
UMR began to be phased-in on 1 September 2016 for the largest market participants and broader implementation of variation margin requirements occurred in March 2017. IM requirements continue to be phased-in annually, bar the new extension.
As the market’s struggles to meet the deadlines became apparent, BCBS-IOSCO issued a statement on July 2019 that outlined its recommendation to a one-year extension on the final implementation phase (see figure two). BCBS-IOSCO say that the extended timeline is set to support the smooth and orderly implementation of the IM requirements.
At this point, covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion will be subject to the requirements. According to the BCBS-IOSCO, this is consistent and harmonised across their member jurisdictions and will also help avoid market fragmentation that could otherwise ensue.
All instruments (including physically settled forex forward and forex swap transactions) count for the purpose of calculating the AANA, even if they eventually benefit from an exemption of initial margin exchange.
BNP Paribas explained that given the steep increase in the number of institutions in scope of the September 2020 deadline, in July 2019 BCBS/IOSCO published a revised policy framework stating that the threshold applicable in 2020 would be raised from €8 billion to €50 billion and that the €8 billion threshold would be postponed to September 2021. This statement will be transposed in every jurisdiction in the near future.
Meanwhile, in terms of the instruments concerned, BNP Paribas say that the scope of non-cleared derivative instruments that are subject to the collection of initial margin is generally consistent across the main jurisdictions in Europe, Asia Pacific and the US.
Physically settled forex forwards and swaps are excluded across all jurisdictions. However, some jurisdictions may have specific exemptions, either on a permanent basis (e.g. equity options and forwards are out of scope in the US) or on a temporary basis (e.g. equity options are exempted in the EU only until 4 January 2020), BNP Paribas outline.
In terms of how prepared companies are for IM, Murray says that despite the extended deadline, he hasn’t heard of anyone taking their foot off the gas.
“I haven’t seen a spike in client interest but I also haven’t seen a slowdown in client interest,” he explains. “I think there are a number of clients out there who have been sat waiting for this to come out who are now going to have to gear up to get going because they realise they are still phase five.”
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Figure 2
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